Disappointed CEOs expect rate cut by February

Disappointed by the Reserve Bank of India’s decision today to keep interest rates unchanged, top CEOs and their finance heads are expecting the RBI to cut rates early next year by when the inflation will be under full control.

Though many India Inc leaders said they are disappointed that a rate cut did not materialise today, they added the economy is moving in the right direction and that the government is taking the right steps to boost economic growth.

CEOs were expecting that with a fall in interest rates, sales of two wheelers and cars would pick up, apart from giving the real estate sector a boost. But with the RBI deciding to maintain the status quo, CEOs say they are disappointed.

“It was expected by almost everyone that RBI would like the benign inflation to sustain and would not let it slip — though industry may clamour for rate reduction. In my view, this is not going to affect growth — since even if the rate was reduced by 50-100 BP, even then, there was no reason that industry will rush to invest,” said Prabal Banerjee, President (International Finance) of Essar group.

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The investment cycle is likely to start only after a 9-12 month time lag because the present idle capacity has to be utilised and only after will industry invest in new capacity based on sustainable demand.

“Once the inflation is controlled for a longer period, then only, we can hope for gradual reduction in interest rate by RBI,” Banerjee said.

Ajay S Shriram, president of lobby group Confederation of Indian Industry, said that the “RBI has leaned in favour of anchoring inflationary expectations in its pursuit of finding a solution to the growth-inflation conundrum which is as per market expectations.”

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At this juncture, even a symbolic cut in policy rates would have sent a strong signal down the line that both the government and the RBI are acting in concert to harness demand and take the economy into a higher orbit of growth. Industry was particularly hopeful of a rate cut considering that China has surprised the market by reducing interest rates by 40 basis points to attract investments. A rate cut would have propelled investment demand, spurred spending in rate sensitive consumer durables and given a fillip to construction activity.

At a time when economic recovery is still fragile and industry is growing at a faltering pace, a bold decision by the RBI to ease interest rates would have particularly benefitted the credit starved SMEs (small and medium enterprises) and improved the poor credit offtake by industry. “What is more, the recent softening of inflationary momentum and the movement of consumer price index towards the RBI’s comfort zone indicates that most of the conditions for bringing interest rates down are being fulfilled,” said Shriram.

“Going forward, CII hopes that the RBI would move in favour of growth in its next monetary policy and the new year would witness a cut in policy rates by at least 50 basis points,” added Shriram.

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But others warn of volatile crude oil prices. “Please also note that while Brent prices are major contributor to low inflation, there is no certainty that this scenario will sustain by OPEC countries. Hence, if such glut of oil production remains for a long time, OPEC may be forced to reverse the trend and then Brent prices may move up again with negative impact on inflation which the country can ill afford,” Banerjee said. “So RBI (is) taking the wise step of wait and watch policy and may effect the reduction in early 2015 only if the present trend continues,” he added.